CPC Retirement Plan Design & Administration 2 — Questions and Answers
Question 1: A small business owner wants a plan that allows discretionary employer contributions but does NOT require mandatory contributions in unprofitable years. Which plan type best meets this need?
- Money purchase pension plan
- Profit-sharing plan (Correct answer)
- Defined benefit plan
- SIMPLE IRA
Correct answer: Profit-sharing plan
Profit-sharing plans allow employers to make discretionary contributions each year, including zero contributions in years when the business is unprofitable.
Question 2: Under IRC §416, a defined benefit plan is considered top-heavy when the present value of accrued benefits for key employees exceeds what percentage of the total?
- 50%
- 60% (Correct answer)
- 70%
- 80%
Correct answer: 60%
Under IRC §416, a plan is top-heavy when more than 60% of the aggregate accrued benefits (or account balances in DC plans) belong to key employees.
Question 3: Which vesting schedule is the FASTEST allowable for employer matching contributions under ERISA?
- 3-year cliff
- 2-year cliff (Correct answer)
- 6-year graded
- Immediate 100%
Correct answer: 2-year cliff
Matching contributions must vest on at least a 2-year cliff or 6-year graded schedule, making 2-year cliff the fastest permissible schedule for matching.
Question 4: A 401(k) plan fails the ADP test. Which corrective method allows the plan to avoid excise taxes by returning excess contributions within 2.5 months after plan year end?
- Qualified Non-Elective Contribution (QNEC)
- Recharacterization of excess contributions
- Distribution of excess contributions (Correct answer)
- Plan amendment to safe harbor status
Correct answer: Distribution of excess contributions
Distributing excess contributions (and allocable income) within 2.5 months after year-end avoids the 10% excise tax on the employer for late correction.
Question 5: An employee terminates vested participation in a defined benefit plan. When must the plan begin distributions if the employee does not elect otherwise and has reached normal retirement age?
- No later than April 1 following the year the employee turns 73
- Within 60 days of the later of plan year end or attainment of normal retirement age (Correct answer)
- Within 90 days of termination
- By December 31 of the year following termination
Correct answer: Within 60 days of the later of plan year end or attainment of normal retirement age
ERISA requires that benefits be available within 60 days of the close of the plan year in which the later of normal retirement age attainment or plan participation occurs.
Question 6: Which type of employer contribution to a 401(k) plan is NOT subject to the ADP/ACP nondiscrimination testing?
- Employee elective deferrals
- Employer matching contributions
- Qualified Non-Elective Contributions (QNECs) (Correct answer)
- After-tax employee contributions
Correct answer: Qualified Non-Elective Contributions (QNECs)
QNECs are fully vested, non-discriminatory employer contributions that can be used to correct ADP/ACP failures and are themselves exempt from those tests.
Question 7: Under ERISA's minimum participation rules, a plan generally may NOT require an employee to complete more than how many years of service before becoming eligible to participate?
- 6 months
- 1 year (Correct answer)
- 2 years
- 3 years
Correct answer: 1 year
ERISA generally limits eligibility service requirements to 1 year (or 2 years if the plan provides 100% immediate vesting upon entry).
CPC Retirement Plan Design & Administration 2
A small business owner wants a plan that allows discretionary employer contributions but does NOT require mandatory contributions in unprofitable years.
Which plan type best meets this need?